India's government told fuel retailers to raise the price of subsidised diesel in small amounts every month starting today in an attempt to prop up public finances without causing a popular backlash before elections.

Fuel subsidies are a drain on India's finances and the government is struggling to bring the deficit within a target of 5.3 per cent of gross domestic product for the financial year ending March.

The government has called for increases of about one US cent per litre each month, a source said, adding that bulk buyers will have to pay market rates for diesel.

According to a government calculation, this step will affect almost a fifth of diesel sales and should boost by some $2.4 billion annually revenues at the companies, which suffer losses selling fuel below cost.

Earlier in the day, Oil Minister Veerappa Moily announced the state-run fuel retailers would be responsible for diesel pricing, a change from the previous system where the cabinet set prices, but he indicated the government will keep some control.

"We cannot abruptly put an end to the subsidy or the under-recovery. Looking into all the economic aspects, we have taken the decision to give oil companies the liberty to make small corrections," he said.

The government also loosened a cap introduced in September on the number of subsidised cooking gas cylinders permitted to each household after widespread criticism the quota was unfair on the poor. The cap will now be nine cylinders per year, up from six. That is expected to add Rs93 billion ($1.70 billion) to the annual subsidy bill.

Deutsche Bank estimated an increase in the diesel price by 0.5 rupees (about one US cent) per month would raise oil company revenues by Rs215 billion, or Rs120 billion taking into account increased spending on cooking gas. It is not clear for how long the monthly increases will run.

Petrol prices will be cut by 0.25 rupees per litre from today.

Prime Minister Manmohan Singh's government is trying to revive the economy, which is set to grow at 5.7-5.9 per cent this fiscal year.-Reuters